Posted by: CS | January 15, 2014

This Is No Time for a Raise: It’s Time for a Negative Tax

Generals, it is said, always prepare to fight the last war. Economists, it seems, always prepare to fight the last depression.

Thus, today, a hundred economists have signed a letter beginning:

We, the undersigned professional economists, support the “Catching Up to 1968 Act of 2013,” sponsored by Congressman Alan Grayson of Florida. This measure would raise the federal minimum wage from its current level of $7.25, established in 2009, to $10.50 per hour, and with automatic increases indexed to inflation thereafter.

The push for a 44.8% raise in the US Federal minimum wage is backed by a flashy Web site: timeforaraise.org and some big names, including, Ralph Nader on the left, and Ron Unz, of the American Conservative on the right, plus quotes from the two Roosevelt’s, Theodore: “We stand for a living wage,” and Franklin D.: “A fair day’s pay for a fair day’s work.”

Trouble is, an increase in the minimum wage will do much more harm than good, as is the case with Paul Krugman’s demand for super-humungous-ginormus stimulus spending to provide trickle down relief for those at the bottom of the heap.

No doubt that if today’s big economic ideas had been applied consistently during the last great depression they would have afforded great relief and probably a full and rapid economic recovery. But since then things have changed in two fundamental ways.

First, the US economy is no longer a virtually closed system. Second a pair of hands is no longer worth what it once was. The implications are two-fold.

First, a substantial increase in US wages lowers America’s international competitiveness, particularly in the low-wage, low-skill sector of the economy most affected by a change in the minimum-wage rate. Lower international competitiveness means increased imports, decreased exports and increased off-shoring of what remains of the domestic industry, for a net reduction in jobs.

Second, increased wages accelerate the drive to increased automation, including: automated retail checkouts; robotization of simple, low-skill tasks in manufacturing; substitution of computerized systems for clerical staff, for a further net reduction in jobs.

Since Obama took office, the number of working age Americans without a job has increased by ten million. Raising the minimum wage will merely push America further in the direction of no-hope economies such as Greece and Spain, where most young people are unemployed and over a quarter of the entire workforce is unemployed.

What then to do?

If Americans, and other Western nations, are to honor the ideals expressed by the Roosevelt’s, the solution is rather simple. Two things are required:

First, A free labor market where wages can fall to whatever level is necessary to achieve full employment. Second, a new income tax regime in accordance with which the US Treasury gives every person in full-time employment an amount, let us say $10.00, for every hour worked up to a maximum of 1500 hours per year.

The cost of such a program, before the clawback of benefits from higher paid workers, would be about $2.25 trillion dollars. Which is a lot, but less than the $2.85 trillion that Americans spend on private and publicly funded healthcare, without a noticeable benefit in longevity, obesity or other measures of health as compared with citizens of countries spending less than half as much.

But much and probably most of the cost of a negative tax would be recouped through a clawback, an additional tax on the income of higher paid workers. The tax might well be modeled on Canada’s Old Age Security payment of around $6500 per year that is available to every citizen over the age of 65, and which is taxed back from those with incomes over $51,000, with 100% recovery from those with incomes over $115,000.

So the net cost of a negative tax would likely be in the vicinity of $1 to $1.5 trillion, or slightly more than current US defense and war spending.

But, there would be many major savings, obviously. Since most able-bodied people of working age would find work at some wage in excess of $0 per hour, it would mean a huge reduction in welfare spending. In addition, there would be large reductions in the costs of crime and mental illness associated with high unemployment.

Further, there would be an expansion of the US economy as ten or twenty or more million Americans went to work for companies created to take advantage of the low-wage labor made available by abolition of minimum wage laws. Once again Americans could make shoes and shirts, car parts and computers for one another in a fair contest with Asian manufacturers. As the workforce gained in workplace skills, the US could once again export textiles, car parts, etc., even to the Third World. The US economy would put on a spurt and government tax revenues would swell as the small business sector once again prospered.

A negative income tax and a free labor market will, of course, never be adopted. At least not during the current depression. Most probably, though, they will be tried during the next depression when conditions are totally different and the applied solution will be irrelevant.

Those whom the gods would destroy they first make economically illiterate.

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